Dec 9, 2011 0
I am back. Sorry for the long hiatus.
My last entry discussed extended duration treasuries and their role in a portfolio. If you have been listening to financial industry experts and commentators during the spring and summer you may have been inclined to avoid mid to long duration treasuries. Some commentators have even suggested that you avoid bonds altogether and load up on dividend paying stocks or stocks with a history of increasing dividends.
I am not one to dissuade investors from investing in defensive stocks, high dividend stocks or stocks that regularly appreciate their dividend payout. However, discouraging people from owning bonds and especially treasuries in an environment that is at best volatile and at worst deflationary is bad advice. In mid July when I discussed EDV (Vanguard Extended Duration Treasuries ETF) the price was $82 per share. Today the price is close to $118 that’s a 44% increase in about 5 months. No other asset type has even come close to such a performance. These bonds pay just over 3% and have an average duration of 27 years.
If you have benefited from my advice and made a 44% return on EDV then congratulations. But, one thing should be clear before you assume I am a “genius” and start expecting regular tips that will perform in spectacular fashion – I did not know that EDV was going to out perform other assets when I wrote to recommend that investors hold some in their portfolios. I was merely suggesting EDV as insurance against a downturn in the stock market. Keep in mind that EDV is very volatile but it moves in the opposite direction to stocks. What is surprising is that the level of appreciation has been much more than the decline in stocks. I think it may indicate the level of fear investors have in the current market valuation.
Investors should not purchase EDV at this time. The price is very high. I would wait until it is at or below $100 per share.